Sounding the Tax Alarm, to Little Applause

Renzo Gadola, a Swiss banker, and his client, an American physician, agreed to meet in the restaurant in the lobby of the Mandarin Oriental hotel in Miami. They talked amiably about tennis, a sport that each enjoyed, until the conversation took a serious turn.

The physician reiterated a request he had made for more than a year: to close two Swiss accounts, one that he had inherited, containing approximately $1 million. Once again, he said, Mr. Gadola, head of RG Investment Partners, advised him to keep the accounts secret, even though federal authorities were cracking down on undeclared foreign bank accounts like his. The physician, who was granted anonymity to describe his interactions with the banker, was prepared for this response.

He was actually working with law enforcement. He wanted to come clean about the tax-evading accounts, and was frustrated with his Swiss bankers’ obstruction. So he had alerted a federal prosecutor that Mr. Gadola would be coming to the United States to meet with clients, and agreed to secretly videotape their meeting in Miami. He spent weeks with law enforcement officials, preparing. On Nov. 6, 2010, the day of the meeting with Mr. Gadola, he placed a leather-bound notebook outfitted with recording equipment on the table between them.

Early the next morning, undercover agents from the Internal Revenue Service arrested Mr. Gadola when he answered his hotel room door. Mr. Gadola cooperated with the government, turning over the identities of United States clients and providing information about UBS, where he was once a financial adviser, and other Swiss banks that helped Americans evade taxes, court documents show.

The physician ultimately closed his Swiss accounts, paying the taxes and penalties owed.

He also filed a whistle-blower claim with the I.R.S.

A 2006 law permits whistle-blowers to file claims and share 15 percent to 30 percent of the back taxes and penalties recovered by the government in tax investigations. The law states that awards will be paid if the I.R.S. collects money “resulting from the information provided” by a claimant. It was passed to encourage tips to recover some of the estimated $450 billion in taxes that the I.R.S. says are evaded in any year.

Mr. Gadola’s information apparently reaped quite a haul. The prosecutor overseeing the case spoke at Mr. Gadola’s sentencing hearing on Nov. 18, 2011, and told the judge that the case spurred United States account holders to enter a voluntary tax amnesty program initiated that year. That program has generated more than $1 billion, according to the I.R.S. (Mr. Gadola pleaded guilty to conspiring to defraud the United States government of taxes and was given a modest sentence of five years’ probation and a $100 penalty. His lawyer said he would not comment for this article.)

The physician, meanwhile, is in limbo. It has been more than three years since his whistle-blower claim was filed. But like many others who have hoped to be paid under the I.R.S.’s program, the physician who helped bring in Mr. Gadola has received nothing.

“It’s been very stressful; I’ve been so far out of my comfort zone on this,” the whistle-blower said. He said that when he had tried to close his accounts, one banker warned of possible retaliation by powerful people in Switzerland if he declared his holdings to American tax officials. “I was scared but I wanted to do the right thing. I had enough of a taste of being trapped in the Swiss banking system that I wanted to expose them any way I could.”

Interviews with lawyers representing a half-dozen recent claimants show how hard it can be for individuals to wrangle an award from the agency. By the end of the 2012 fiscal year, the most recent figures available, only five awards had been made under the new law, according to the I.R.S. This, lawyers say, has the perverse effect of undercutting the law’s intent. “This program is supposed to be a big, fat carrot offered to people with lots of information that they want to share with the government,” said Robert Katzberg, a white-collar criminal defense partner at Kaplan & Katzberg and the lawyer for the client who brought in Mr. Gadola. “But all they’re doing is discouraging people from coming forward by giving whistle-blowers no information and actively seeking to limit judicial and legislative oversight of what they’re doing.”

Setting a High Bar

The I.R.S. has long paid awards to informants providing tips on potential tax fraud. But many of these were small-potatoes cases involving individuals. To attract greater participation and bigger cases, Congress included a new whistle-blower provision in the Tax Relief and Health Care Act of 2006. It set a high bar: The amount of taxes in dispute involving corporations must exceed $2 million; among individuals, cases had to involve taxpayers whose gross income exceeded $200,000 for at least one tax year in question.

The I.R.S. has not reported how much money has been recovered under the new law, or how much has been awarded to whistle-blowers. It has reported that the first award under the new law was paid in 2011. In a recent speech, the director of the whistle-blower office said it paid around $50 million in awards in 2013.

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John Koskinen, the new commissioner of the I.R.S., says he is a fan of the whistle-blower program. “It’s important for the system that taxpayers feel when they’re writing their checks that everybody is paying their fair share,” he said.CreditMichael Reynolds/European Pressphoto Agency

Tips, meanwhile, have poured in. As of 2012, some 1,967 submissions had been made under the new law. These cases are complex, of course, and can take many years to develop. The staff in the whistle-blower office is relatively small, totaling 36 people at the end of 2012.

Nonetheless, Senator Charles E. Grassley, the Iowa Republican who wrote the legislation establishing the whistle-blower office, said he was disappointed with its results. In a September letter to John Koskinen, the newly appointed I.R.S. commissioner, he said a lack of enthusiasm for the program at the I.R.S. was especially mystifying, given that revenue from tax-enforcement actions had fallen 13 percent since 2010. Being more welcoming to whistle-blowers could help the I.R.S. reverse this trend, he argued.

“I have come to the conclusion that they don’t want to cooperate with whistle-blowers,” Mr. Grassley said in an interview, referring to the I.R.S., “because it shows they don’t know how to do their job and they’re embarrassed.”

While the I.R.S. does not comment on specific taxpayer cases, Mr. Koskinen said in an interview that he was still learning about the whistle-blower program and was aware of the criticisms of it. Unlike some former high-level I.R.S. officials who have expressed antipathy toward the program, he says he is a fan. “It’s important for the system that taxpayers feel when they’re writing their checks that everybody is paying their fair share,” he said.

For some whistle-blowers, like Joseph A. Insinga, Mr. Koskinen’s supportive words might be too late. A former managing director at Rabobank, a Dutch institution, Mr. Insinga filed a whistle-blower claim in 2007, contending that the bank helped six American corporations and two European banks evade more than $1 billion in taxes.

Lynne Burns, a spokeswoman for Rabobank, provided this statement: “Rabobank believes that Joseph Insinga’s statements to media and to government authorities regarding certain transactions conducted by Rabobank more than a decade ago significantly mischaracterize the facts and the bank’s role in those transactions. Rabobank has at all times cooperated fully with all governmental authorities’ requests for information.” (The bank has not been charged with any wrongdoing.)

Unlike other whistle-blowers, Mr. Insinga has gone public. On June 25, 2007, just two months after he filed his claim, he and his lawyer came to New York City and briefed three I.R.S. officials for several hours. Among other things, he handed over an internal audit from the bank identifying 94 dubious transactions set up solely to avoid taxes, court filings show.

The case seemed to be moving quickly. Four days after the meeting, the court records show, the I.R.S. sent Mr. Insinga’s whistle-blower submission and supporting documents to the I.R.S. audit teams for the institutions he had identified. A few months later, I.R.S. officials acknowledged in a phone call with Mr. Insinga and his lawyer that Mr. Insinga had helped them solve one mystery: how one company had been able to effect such a low tax rate.

Then came years of silence.

Periodically, Mr. Insinga would piece together evidence that his tips were being pursued. Some of the companies he had identified began disclosing the existence of tax disputes in their Securities and Exchange Commission filings. In 2010, one of them — General Mills — said it expected to pay $425 million in tax liabilities, those filings show, including those associated with the transactions that Mr. Insinga said he identified.

(Tom Forsythe, a spokesman for General Mills, said the company had disclosed the transaction to the I.R.S., stating the company’s position on it when it was initiated. After an audit, the I.R.S. took a different position on the transaction, he said. This required the payment of additional taxes.)

On Nov. 3, 2011, according to court records, Mr. Insinga received an email from the I.R.S. program manager, saying his claim was “on life support” and would soon be rejected because “other sources of information” had led to tax recoveries.

Still, the I.R.S. did not get around to rejecting Mr. Insinga’s claim until April 2013, a year after Andrew R. Carr Jr., his lawyer in Memphis, filed a suit demanding a determination. The agency said it had not used Mr. Insinga’s help to generate back taxes and penalties for most of the instances that Mr. Insinga claimed in his whistle-blower filing. The I.R.S. said it was still analyzing information he provided on one company.

In the meantime, Mr. Insinga, 63, says that being a known whistle-blower has made it impossible to find a job. He has sued the I.R.S., asking for documents that he says will prove that his help led to the recoveries.

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Senator Charles E. Grassley, who wrote the legislation establishing the whistle-blower office, is disappointed with its results. “I have come to the conclusion that they don’t want to cooperate with whistle-blowers,” he said, referring to the I.R.S., “because it shows they don’t know how to do their job and they’re embarrassed.”CreditGabriella Demczuk/The New York Times

“Under the law they have to pay 15 percent at a minimum, but they just don’t want to pay it,” Mr. Insinga said of the I.R.S. “They don’t want to admit that these tax schemes existed for years under their nose and they were unable to do anything about it until I provided them with the smoking gun.”

An Awkward Victory

A little over a year ago, whistle-blowers were encouraged by the disclosure that the I.R.S. had paid an enormous sum — $104 million — to Bradley C. Birkenfeld, a former UBS banker who provided Swiss banking secrets to United States authorities. As a result of Mr. Birkenfeld’s information, UBS paid $780 million to the United States Treasury and handed over account information relating to 4,500 American clients.This was a big victory for the government and the whistle-blower program, but it also proved a tad awkward. Mr. Birkenfeld received his award after serving two and a half years in prison for helping a client evade United States income taxes.

If paying such a huge sum to a man with a criminal record contributed to the I.R.S.’s seeming resistance to paying other whistle-blowers, the agency is not saying. William J. Wilkins, the current I.R.S. chief counsel, declined to be interviewed for this article.

But Donald Korb, a former chief counsel at the I.R.S., made his objections to the program known in a 2010 interview in Tax Notes, a scholarly chronicle of all things tax. “The new whistle-blower provisions Congress enacted a couple of years ago have the potential to be a real disaster for the tax system,” he said in the interview. “I believe that it is unseemly in this country to encourage people to turn in their neighbors and employers to the I.R.S., as contemplated by this particular program. The I.R.S. didn’t ask for these rules; they were forced on it by the Congress.”

Mr. Korb now heads the tax-controversy practice at Sullivan & Cromwell. Asked if his views on the program had changed, he said absolutely not.

Practical steps taken by the I.R.S. would either make it hard for a whistle-blower to qualify for an award or would reduce the size of a payout. Soon after the law was passed, for example, the I.R.S. took the position that a whistle-blower could not appeal if the I.R.S. denied a claim. The tax court rejected that idea, but the I.R.S. has also argued that no award should be paid when the information supplied by a whistle-blower prompts a company to pay additional taxes without a fight. It has proposed rules that would make a reward mandatory only if the whistle-blower was the sole basis for the recovery of back taxes; it has also changed the calculation for coming up with the proceeds on which awards would be based by excluding penalties paid by scofflaws.

Finally, after the budget sequestration became law last March, the I.R.S. announced that it would cut whistle-blower awards by 8.7 percent, even though awards are paid out of proceeds collected by the I.R.S., not its appropriations.

Asked whether there was an institutional distaste for the program, Mr. Koskinen, the new commissioner, said he had gotten no such indication from his discussions with I.R.S. officials. “But there’s an ethos in society about snitches and telling tales out of school,” he said. “My view is if people are cheating on their taxes, it’s a public service to let us know.”

A $1 Billion Haul

The physician who helped the government secure the cooperation of Mr. Gadola, the Swiss banker, is still waiting to hear about his claim. And his lawyer, Mr. Katzberg, has found the I.R.S. to be less than cooperative. It took him more than a year and a lawsuit just to find out how much money Mr. Gadola’s cooperation has generated to the agency.

Mr. Katzberg argues that without his client’s help, Mr. Gadola would not have cooperated — and that without Mr. Gadola, the government would not have seen the rush of people voluntarily disclosing their offshore accounts under a 2011 amnesty law.

To support this view, Mr. Katzberg points to the statement by Mark F. Daly, the assistant United States attorney for the tax division, at Mr. Gadola’s sentencing, “The very public nature of his cooperation in the prosecutions of others,” Mr. Daly said of Mr. Gadola, “has allowed the I.R.S. to spur U.S. taxpayers to voluntary disclosure.”

The I.R.S. repeatedly declined to disclose how much was recovered in the 2011 tax amnesty, citing taxpayer secrecy laws. So Mr. Katzberg sued the I.R.S. in the Federal District Court in Manhattan, asking for the figure. That did the trick. The total tax penalty and interest collected in the 2011 voluntary disclosure was $1,055,973,577. Mr. Katzberg suggests that his client is entitled to at least 15 percent of that figure — a huge amount indeed.

Now that he has the figure, Mr. Katzberg has been told by the whistle-blower’s office that it has still not received an opinion from legal counsel — and does not expect one for some time — on whether it is bound by the prosecutor’s statement about the importance of Mr. Gadola’s cooperation.

Elkan Abramowitz, a partner at Morvillo Abramowitz Grand Iason & Anello and a criminal defense lawyer who has no involvement in the case, says he believes the I.R.S. is bound by the prosecutor’s statement, a statement of fact. “The government could say, ‘We want to have a hearing on this, we don’t think it’s factual,’ in which you can examine the witnesses,” Mr. Abramowitz said. “But that’s not what they’re doing. They’re just stonewalling.”

A version of this article appears in print on , on Page BU1 of the New York edition with the headline: Sounding the Alarm, to Little Applause. Order Reprints | Today’s Paper | Subscribe